Consumers need to be more disciplined when using borrowed money, he says

Oct. 12, 2013

Jeff Plagge witnessed the crisis firsthand.

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Northwest Financial Corp.

EmployeesJune 2013… 405 June 2008… 369 Banking OfficesJune 2013… 26 June 2008… 23 Total AssetsJune 2013… $1.549 billion June 2008… $1.161 billion Total LoansJune 2013…$1.217 billion June 2008… $934 million Total DepositsJune 2013… $1.345 billion June 2008… $976 million Net Income per quarterJune 2013… $5.549 million June 2008…$2.394 million

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American Bankers Association Chairman Jeff Plagge witnessed the crisis firsthand from his perch as a community banker.

Plagge is president and chief executive of Northwest Financial Corp., based in Arnolds Park. The community bank holding company operates three bank businesses: Northwest Bank in Spencer, First National Bank of Creston, and First National Bank of Sioux Center.

Q: What lessons have we learned the past five years?

A. “At the end of all of it, we all got reminded that personal accountability, rules and regulations and the dangers of leverage really do matter,” Plagge said. “As I have said before, leverage works right up to the point where it doesn’t.”

Q: What if anything have we failed to learn?

A. Consumers continue to be barraged with opportunities to make purchases with borrowed money, and they need to be more disciplined in their evaluation of them, Plagge said.

“As I used to tell customers in my lending days, ‘just because someone offers you a loan doesn’t mean you should take it,’ ” he said, noting the final shape of financial reform remains incomplete. “We just can’t know if all of these changes will avert or substantially lessen the next crisis until it shows up on our front door. ... Crises come and go, and so do learned behaviors. Some stick and some don’t. It’s like dieting — easy to do for a short period of time, (but) harder over a sustained period of time.”

Q: What were the biggest lessons for you,NFC, and the American Bankers Association?

A. “Our biggest lessen (at NFC) was that discipline still pays off in the long run. We didn’t avoid all of the problems, but we avoided the biggest ones. Survivors in any business make fewer and smaller mistakes than their competitors

“It was easy to get caught up in the economic bubble. Business and housing were booming. You want to protect your customer base, and when competitors come after them, you start looking at exceptions to normal rules in order to meet the competition.

“(One) lesson is that when exceptions become the rule, problems will eventually surface. Other lessons (are that) strong capital is important, understanding all concentrations is very important, and you have to remember to keep doing business even when times are tough. As we kept telling our leaders, ‘We just have to bank our way through all of this.’

“All of this reminded everyone in banking that risk management is at the heart of our business. Banks are in the risk business, so risk is a given. What everyone learned is that you can’t look at risk in silos. It was the collision of many, many high risk behaviors that almost brought the system down — not just a single behavior that was taken to an extreme.”

Q: How badly was NFC hurt by the global financial crisis in terms of sales, net income, stock price and market share?

A. “Fortunately, our banks painted within the lines for the most part so we didn’t get hurt badly by the crisis,” Plagge said. “Like many community banks, we had an exposure to residential and commercial development lending. We managed that exposure pretty well and missed most of the big problems that surfaced in Iowa, (but) we didn’t avoid all of them.

“Although we made less money for a few years as a company, our earnings stayed strong, compared to peers around the country. We are a privately held company so our stock price isn’t subject to the ups and downs of Wall Street. The book value of NFC continued to grow all of the way through the crisis.”

Q: How badly was the banking industry hurt?

A. “The majority of banks, especially community banks, in the United States had a story similar to ours,” Plagge said. “You read about those that didn’t. You don’t read about the majority of the banks that came through the downturn pretty much unscathed, other than just the normal impacts of a slower economy. As a whole, the banking industry was painted with a broad brush and when criticisms were leveled, some justified and some unjustified, at the industry the criticisms impacted all of us. The word ‘bank’ was used as a synonymous term, whether the discussion was about a Wall Street investment bank, a midsized commercial bank or a community bank. That hurt all of us and all of us have had to deal with the reputation and trust issues that have come from the debate.”

Q: How close is NFC and the banking industry to a complete recovery from the global financial crisis?

A. “Financially, the banking industry has pretty much recovered with the exception of a few players,” Plagge said. “Capital levels are extremely strong, problem loans are substantially reduced, leverage in the industry has dropped, large banks are shedding some of the ancillary business lines that caused them regulatory and reputation risks, and there is a bit of a pick-up in business.

“The big banks are still fighting lots of litigation and regulatory initiatives. This is costing them millions and in some cases billions. They have earnings to pay it, but it will impact them for years to come. On the other side of the equation, community banks weren’t as impacted by the crisis, but they are now feeling the impact of the current interest rate cycle, just like many of our deposit customers, and the cost of all of the new rules and regulations. Both of these will have a drag on earnings going forward.”

Q: Are there any ways in whichNFCand the banking industry benefited from the crisis?

A. “As a company, we continued to grow organically through the crisis and we also acquired eight branches from two other banking organizations. Again, we kept our balance sheet clean before the crisis and during the crisis so it afforded us some opportunities.

“I do think the industry is now much stronger and will continue to be stronger and smarter because of what we just came through. Regulations are tougher, and in many cases rightly so, and (regulators) continue to be attentive to risks. Bank management has to operate in the same mindset.”

Q: What’s the hardest decision you had to make?

A. “The hardest thing anyone has to do during a crisis is to stay calm and rational and avoid overreaction. If you go into a cave during a crisis, problems don’t get solved and opportunities are missed.”